Oil Prices and Government Bond Risk Premiums

The Lahore Journal
of Business

Lahore Journal of Business

(HEC recognized journal in “Y” category)

The Lahore Journal of Business is aimed at providing a specialized forum for dissemination of qualitative and quantitative research in various areas of business administration. The LJB invites researchers, policy makers and analysts to submit original theoretical and empirical papers that explore and contribute to the understanding of various areas in the business domain. The Journal aims at bringing together state-of-art research findings, particularly from emerging markets, in various business disciplines including (but not limited to) accounting, banking, management, marketing, finance, investments, human resource management and organizational behavior.

Oil Prices and Government Bond Risk Premiums

Hervé Alexandre and Antonin de Benoist

Abstract

This article analyses the impact of oil prices on bond risk premiums issued by emerging economies. No empirical study has yet focused on the effects of oil prices on government bond risk premiums. We develop a model of credit spread with data from the EMBIG index of 17 countries, from 1998 to 2008. An analysis in time series is carried out on each country and a panel analysis used to determine the global impact of oil prices on investors’ risk perceptions. We suggest a new estimator for oil prices to take into account the effect of the price variance, and show that oil prices influence the risk premiums of sovereign bonds along with the price volatility that increases the accuracy of the model.